When a Texas printer/fulfillment house mails direct-mail advertising for an out-of-state customer to addresses both inside and outside Texas, how much of the charge is subject to Texas sales tax?

Plain-English summary

A Dallas business designed direct-mail advertising for a California customer, sent the design to a third-party printer, and had a separate fulfillment vendor sort, label, and mail the finished pieces nationwide -- some to Texas addresses, some out of state. The business billed its California customer for the whole job and had been charging Texas tax on the entire charge. The Comptroller ruled that's too much tax: Texas tax is only due on the pieces mailed to Texas addresses, not on pieces the third-party mailer sends outside Texas. Because the job mixes in-state and out-of-state delivery, the taxable share is worked out as a percentage -- the number of pieces delivered to Texas addresses over the total number of pieces sold -- and the business should keep U.S. Postal Service shipping records to prove which pieces went out of state. The business can also issue a resale certificate to its own printer instead of paying tax on the printing charge, since it's reselling the finished pieces to its customer. If it already over-collected tax on out-of-state pieces, it may refund or credit its customer and then amend its own Texas sales tax returns under Rule 3.325 to recover the excess from the state.

What this means for you

Advertising agencies, printers, and mailing/fulfillment houses

If you produce direct mail for a customer and the mailing goes to both Texas and out-of-state addresses, don't charge Texas tax on the whole job. Only the Texas-addressed pieces are taxable; source the tax using a percentage of Texas pieces to total pieces mailed, and keep shipping documentation (USPS records) to back up the out-of-state share. You can also use a resale certificate with your own printer rather than paying tax upfront on the printing charge.

Businesses that over-collected tax on out-of-state mail

If you already charged and collected tax on pieces mailed outside Texas, you can refund or credit your customer for the error and then amend your own sales tax returns (per Rule 3.325) to get that overpayment back from the state.

Common questions

Q: Is Texas tax due on direct-mail pieces sent to out-of-state addresses?
A: No, per this letter -- only pieces mailed to Texas addresses are subject to Texas tax.

Q: How do I figure out how much of a mixed in-state/out-of-state mailing job is taxable?
A: Per this letter, use a percentage: the number of pieces delivered to Texas addresses divided by the total number of pieces sold in the job.

Q: What proof do I need that pieces went out of state?
A: Per this letter, retain U.S. Postal Service shipping documents substantiating out-of-state delivery.

Q: Can I get back tax I mistakenly charged on out-of-state pieces?
A: Per this letter, yes -- refund or credit the customer, then amend your Texas sales tax returns under Rule 3.325.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.325 (refunds and amended returns)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9706504L

Original ruling text

June 5, 1997

Dear ***:

Thank you for your letter of May 27, 1997. You asked for an opinion on the
taxability of advertising materials produced by your client for an out-of-state
customer. The advertising materials are mailed to Texas addresses and outside
of Texas.

Facts: An order for direct mail advertising is placed by a customer located in
California to your client in Dallas, Texas. Your client has no presence in
California or any other state besides Texas. Your client designed the
advertising materials and sent the design to a third-party printer. The
printer sends the materials directly to another vendor who sorts, labels and
ultimately mails the pieces to the customers of our client's customer
throughout the country. Your client pays the printer and the fulfillment house
for their services. Your client bills its California customer and charges
Texas tax on the transaction.

Response: Texas tax is not due on materials mailed outside of Texas by the
third-party mailer. Texas tax is due on the materials mailed to Texas
addresses. Your client should retain U.S. Postal Service shipping documents to
substantiate out-of-state delivery. Your client may issue a resale certificate
to the third-party printer in lieu of paying tax on the printing charges.

Because the transaction involves both in-state and out-of-state delivery, the
materials subject to Texas tax can be determined by creating a percentage using
the total number of items sold by your client and the total number of items
delivered in Texas. Your client is responsible for collecting and remitting
Texas tax on the materials mailed to Texas addresses.

If your client has collected Texas tax on items shipped outside of Texas in
error, he may refund the tax to the client or with the client's permission
credit the client's account. Your client may then amend his Texas sales tax
returns to obtain a refund from the state. Please refer to Rule 3.325.

This opinion is based on the facts presented. If there are any additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0037. The direct line is
512/475-0037. You also may write to Sales Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Lindey Osborne
Sales Tax Policy Division